Empower state-run banks’ boards, cut government control: Rajan

Mumbai, Aug 16 (IANS) Outgoing Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday suggested empowering of boards of state-run banks while making the case for a major reduction in government and regulatory oversight, including by the RBI itself.

“Today, a variety of authorities — parliament, the Department of Financial Services, the Bank Board Bureau, the board of the bank, the vigilance authorities, and of course various regulators and supervisors, including the RBI — monitor the performance of the public sector banks,” Rajan said in his address here at the FICCI-IBA Annual Global Banking Conference.

“With so many overlapping constituencies to satisfy, it is a wonder that bank management has time to devote to the management of the bank,” he said.

Proposing withdrawal of RBI nominees from the boards of public sector banks, Rajan stressed the need to reduce the overlaps between the jurisdictions of the authorities, while specifying “clear triggers or situations” where one authority’s oversight is invoked.

He said agencies like the Comptroller and Auditor General (CAG) and Central Vigilance Commission (CVC) should only get involved in extraordinary situations where there is evidence of malfeasance, and not when legitimate business judgment has gone wrong.

“It is important that bank boards be freed to determine their strategies. Too much coaching by central authorities will lead to a sameness in public sector banks,” the Governor said.

“Over time, RBI should also empower boards more, for instance, offering broad guidelines on compensation to boards but not requiring every top compensation package be approved,” he said.

“Though the most pressing task for public sector banks is to clean up their balance sheets, a process which is well underway, a parallel task is to improve their governance and management.”

“Over time, as the bank boards are professionalised, executive appointment decisions should devolve from the Bank Board Bureau (BBB) to the boards themselves, while the BBB, as it transforms into the Bank Investment Company (BIC), which is the custodian for the government’s stake in banks, should focus only on appointing directors to represent the government stake on the bank boards,” he added.

Rajan, whose tenure ends in early September, also voiced concern over state-run banks shunning project loans, saying they should tap their large low-cost deposits from “casa” or current account saving accounts deposits to finance infrastructure projects.

He said that since the crisis in the infrastructure space, banks are shunning project loans and are aggressively targeting retail borrowers.

“There are inputs to making profitable project loans such as the availability of casa deposits that will be accrued to the banks that build out their IT to access and serve the broader saver cheaply and effectively,” Rajan said.